The Week in Russell 2000 Trading – 6/22 – 6/26

Both indexes were lower last week, but the Russell 2000 (RUT) slightly outperformed the Russell 1000 (RUI) and continued to maintain a wide performance gap for 2015. The chart below indexes both the RUT and RUI to 100 as of the last day of 2014 to get an apples to apples visual of their respective performance. As of Friday RUT was up 6.23% while RUI has gained 2.58% this year.


The CBOE Russell 2000 Volatility Index (RVX) was down 0.05 for the week finishing at 16.18 while the CBOE Volatility Index (VIX) gained 0.06. The result, when judging the relationship between the two, was relatively high confidence that small caps stocks will keep pace (or beat) large cap stocks over the next few weeks. That doesn’t mean the option players are correct in this outlook, that’s just an indication gained from RVX resting at a pretty low premium relative to VIX.


I decided to take a look at Tuesday block trades for RUT option executions late in the afternoon as the Russell 2000 closed at an all-time high. It didn’t take much searching for a RUT trade fading the move to the upside. With seconds left in the trading day there was a bearish ratio spread that was executed in three different lots with the ratio coming very close to 3 options sold for every 2 options purchased. Taking the size down to the lowest denominator, there was a seller of 3 RUT Jul 17th 1320 Calls at 4.62 each who then also purchased 2 RUT Jul 17th 1330 Calls at 2.47 each. The net result was a credit of 8.92 per spread and a payoff at expiration that looks like the picture below.


When the trade was initiated, RUT would need to climb about 1.9% to reach the short strike of 1320. Tuesday the Russell 2000 closed at 1295.80, but was lower the following three days in a row to finish the week 16 points lower than the Tuesday record close at 1279.80. In fact, taking a look at the settlement prices on Friday the 1320 Calls finished the week down at 2.43 and the 1330 Calls at 1.29. If the spread were exited at those prices the results would be a profit of about 4.00.